This article analyzes the loss of Canadian sovereignty due to the actions taken by Trudeau in 1974 to halt borrowing from the Bank of Canada.
In addition, the article also analyzes the role of the Bank of Canada in fostering prosperity in Canada from 1934 up until 1974.
Bank of Canada 1938-1974
Since 1938 – 1974, the Bank of Canada has played a significant role in financing various projects in Canada including;
Funding for WW2
Social Welfare Programs
These are addressed in more detail below.
Funding for WW2
Due to the interest free loans from the Bank of Canada, Canada’s Minister of Munitions & Supplies, C.D. Howe, led the Government to create over 28 Crown Corporations in order to expand the production of goods for the war.
These crown corporations would assist the federal government financially, through the returns that would be gained by providing a public service for all Canadians.
Statistics Canada outlines the return on investments from Crown Corporations under section H of the volume titled; Historical Statistics of Canada.
The graph below was created from the data found in subsection H13 – Return on Investments from Crown Corporations.
The graph below shows that the ROI from Crown Corporations had jumped from less than $3 million in 1940 to over $1.4 billion in the 1970s.
Many of the crown corporations had been established during Mackenzie King’s government of the late 1930’s and 1940’s.
These crown corporations not only provided valuable services to the public, but also employed many Canadians as well, helping to drive economic activity.
And in the aftermath of WWII, the government initiated and implemented several social welfare programs, that were funded partially by the Bank of Canada.
Thus it was quite fitting, for a bank working for the public good, to also be funding programs that would benefit those who needed it the most.
Social Welfare Programs
As a result of WW2, the Canadian government launched the Veterans Rehabilitation Act in 1945.
This program supported veterans that had served in the war by providing financial aid and support for education. With the financial aid from the Veterans Rehabilitation Act, 54,000 Veterans were able to attend university.
In 1951, the government had also passed the Old Age Security Act, which provided a universal pension of $40.00 per month, financed and administered by the Federal government.
All Canadians aged 70 and over were eligible regardless of their income or assets.
In addition to the Old Age Security Act, the government also approved the Hospital Insurance and Diagnostic Services Act which marked the beginning of Universal medicare for Canadians.
This act would later be followed by the Medical Care Act of 1966, which would provide Canadians with free access to physician services.
These programs are just a few of the handful of social programs that were initiated for the public good, with partial funding from the national central bank (BoC).
Thus, we can see that from 1938 to 1974, Canada’s prosperity had developed quite substantially, with the money that was created being used to finance not only welfare policies but also infrastructure as well.
And in the 1950’s, Canada went on to fund several key infrastructure projects which included;
Saint Lawrence Seaway
Ontario Highway 401/McDonald Cartier Freeway
1. Trans-Canada Highway
The Trans-Canada highway became one of the world’s longest national highways spanning across all 10 provinces in Canada.
It’s construction began in 1950, and had been fully completed 20 years later, by 1971, with a total cost of $1.4 billion.
2. Saint Lawrence Seaway
The Saint Lawrence Seaway had originally been created in the early 1930’s, however construction had been underway to deepen and straighten it, which required more construction during the 1950’s, and 1970’s.
The Seaway had been a system of locks, canals and channels designed to allow ocean vessels to travel between the Atlantic Ocean and the Great Lakes.
The cost of construction amounted to $400 million through funding from Canada’s own central bank, the U.S., and the private chartered banks in Canada.
3. Ontario Highway 401
Another important infrastructure project was the creation of the Ontario Highway 401. Highway 401, has become one of the busiest highways in North America spanning from Windsor to the Quebec border and had initially cost over $800 million.
Canada’ period of prosperity would continue up until 1974 when Trudeau’s government implemented a decision to halt the borrowing from the Bank of Canada due to “price stability” (inflation).
Loss of Canadian Sovereignty
Several factors influenced the Trudeau government’s decision in 1974 and these included:
Both of these decisions, addressed further below, contributed to the loss of Canadian sovereignty since it started borrowing money at compound interest from private banks.
Many of the social programs and infrastructure projects mentioned above, were subject to fiscal austerity cuts by the Canadian government in order to sustain the compounded interest charges imposed by the private banks.
Fiscal austerity cuts marginalize Canadians and decrease the citizen’s standard of living in addition to the loss of Canadian sovereignty.
As discussed in Part 3 of this series, one of the main factors in Trudeau’s decision to borrow from the private banks stemmed from the Oil Crisis in the 70s.
On October 1973 at the height of the Arab-Israeli War, the Arab members of the Organization of Petroleum Exporting Countries (OPEC) announced an embargo against the U.S., in response to their decision to re-supply the Israeli military during the war.
OPEC members also extended the embargo to other countries that supported Israel, including Canada.
The effects of the embargo had caused the price of oil to quadruple worldwide.
National Resources Canada, presented a graph of the Average Annual WTI Crude oil prices between 1970 – 2000.
The graph revealed that the oil embargo significantly increased the real price of oil.
The difference between the Nominal Price and the Real Price is that the Nominal price, measures the dollar value of oil at the time it was produced.
The Real price adjusts for general price level changes over time, i.e., such as for inflation or deflation. These adjustments present the prices of oil for various years, as if the value of the dollar remained constant.
The rise in oil prices was enjoyed by the Western provinces, particularly in Alberta, as their oil sands created a massive influx of money that quickly made it the richest province in the federation.
However, this caused an imbalance in Canada since the Eastern provinces did not produce oil and were significantly affected by the embargo.
The federal government under Trudeau, attempted to correct this imbalance through the creation of the government owned Petro-Canada Act, and later the National Energy Program, which were used to divert oil from the west to the east.
Trudeau’s national energy program aimed to give Ottawa more control over the country’s energy industry, and increased Canadian ownership of the oil industry.
The Trudeau government also shared Alberta’s oil wealth with the rest of the country and expanded the role for Petro-Canada.
Thus in 1975 they enacted the Petro Canada Act which then led to the establishment of Petro-Canada as a Crown corporation, which would be used to develop and protect the Canadian oil industry.
Despite all of the reforms Trudeau had enacted, the Canadian economy had still plunged into a minor recession due to the oil embargo. Additionally, Canada had also been impacted by the economic instability in the United States.
The instability in the U.S. had crossed the border and contributed to the rise in unemployment and stagflation despite Canadian fuel reserves. Fuel reserves were reserves of oil, kept by the Canadian government, for use in turbulent periods.
The resultant stagflation had been misattributed to the decisions of the Bank of Canada, and to facilitate recovering from the recession, the Trudeau government made the decision made to stop borrowing from the Bank of Canada, and relied on the private banks for money despite the fact that the recession Canada was in had been relatively minor was small compared to the U.S.
The graph below depicts the percentage of Peak Real GDP in Canada and the U.S. from 196o to 2010.
As the figure shows, Canada did not experience a significant recession during the time of the oil crisis, unlike in the U.S.
The U.S. had particularly been hit hard during the crisis since it relied heavily on oil imports, and as oil costs rose, the cost of living rose as well along with inflation, resulting in a larger recession.
In addition to the oil crisis, the Basel committee also influenced the Trudeau government to borrow from the private banks. The Basel Committee is an international think-tank type of organization that is composed of the central bank governors of the G-10 countries.
The Basel Committee, an arm of the Bank of International Settlements (BIS), had been established to maintain monetary and financial stability.
To achieve this goal, the Committee discouraged governments from borrowing money from their respective central banks.
Their thought process is exemplified in an address by the Governor of the South African Reserve Bank, Chris Stals, who said,
The independence of central banks is a topic which is often discussed in this forum. There are many reasons why central banks should be given some autonomy for the implementation of monetary policy. It is accepted that governments (Parliament) established central banks and gave them the special power to create money. Because of this special power, central banks have a great responsibility, and that is to protect the value of the currency (that is, to keep inflation low). The monetary policies needed to keep inflation low, are often very unpopular, and politicians normally do not like to take responsibility for such unpopular measures. Furthermore, the power to create money can easily be abused for short-term gains, but any excessive creation of money in the short-term will eventually lead to higher inflation (and therefore higher interest rates).
Stal’s quote reveals what many of the other central bank governors of the G10 nations had believed at the creation of the Bank of International Settlements in 1974 – that inflation would best be curbed by borrowing from the private banks which would then lead to price stability.
It is evident that the recommendations of the Basel Committee, as well as the onset of stagflation from the Oil crisis had both been strong factors in influencing Trudeau’s regime to halt the borrowing from the Bank of Canada at interest free.
From this decision, one can clearly see that Canada’s fiscal position has deteriorated significantly. Trudeau’s decision has also adversely affected Canadian sovereignty as well.
The effects of Trudeau’s decision are further outlined in Part 7.